The “Jumpstart Our Business Startups” (JOBS) Act, enacted on April 5, 2012, is the first significant liberalization of the U.S. capital markets regulatory regime since the Sarbanes-Oxley Act of 2002 clamped down on securities offerings in the wake of the Arthur Andersen, WorldCom and Enron scandals. The JOBS Act may offer a new path for raising capital both for mature and emerging satellite and space sector companies that have been shut out of the capital markets or relegated to high yield debt and export credit agency finance.
The Securities Act of 1933 requires that all sales of securities be registered in a public filing, unless the proposed sale meets the requirements of an exemption from registration. Because registration entails extensive, costly and time-consuming financial and other disclosure in the form of a highly detailed and regulated “registration statement” to ensure that the investing public is well informed, companies often prefer to raise capital through an offering exempt from registration. Registration exemptions are based upon regulations that generally deem certain classes of investors sufficiently well informed, either by reason of their presumed financial sophistication or their insider status with respect to the issuer, as not to need the benefit of the full disclosure regime. Under such circumstances, securities may be offered in a “private placement” to a limited pool of so-called “accredited investors” with very little disclosure. However, the key to maintaining these exemptions from registration has been that the issuer must not solicit the general public to invest in the offering.
Fundamentally, the regime offers companies seeking to raise capital a choice: register the securities as a public offering, with the benefit of accessing the much larger public investment pool, at the cost of burdensome and expensive disclosure and subsequent governance; or access a smaller pool of a limited number of sophisticated investors through a private placement, giving up the ability to solicit public investment but with the benefit of avoiding the burden and expense required by a registered offering. In either case, the securities fraud, common law fraud and other laws and rules, including those establishing fiduciary duties of company officers and directors towards their shareholders, establish a baseline of protection for the investor.
The JOBS Act liberalizes the private placement rules to allow public solicitation of investors, including through traditional and on-line media, under Rule 506 of Regulation “D” of the Securities Act, the most common basis for exemption, so long as only accredited investors are allowed to invest.
The JOBS Act also creates a new classification of “Emerging Growth Companies” (EGCs). EGCs must have completed their initial public offerings after December 8, 2011, have annual gross revenues of $1 billion or less, have been public reporting companies for less than five years and have a public float (i.e., non-affiliated holders) of securities of less than $700 million. EGCs will be subject to a substantially relaxed reporting regime under the Securities Exchange Act of 1934, including having to put only two years of audited financial statements and related management discussion and analysis and selected financial data in their IPO registration statements; and exemption from the enhanced executive compensation and disclosure analysis and from shareholder voting requirements on certain executive compensation (the so-called “say on pay”) under the Dodd-Frank Act of 2010.
The JOBS Act increases the maximum number of shareholders a company may have before it must begin reporting under the Securities Exchange Act from 500 to 2,000 (no more than 500 of whom may be non-accredited investors).
The JOBS Act also creates a completely new exemption from registration, allowing use of on-line portals for so-called “crowd funding” of small offerings of up to $1 million in a 12-month period in relatively small blocs, depending on the investors’ income or net worth. Although crowd funding has received a lot of publicity, the small overall offering limit and investment limits may discourage its use.
The Securities and Exchange Commission must issue regulations implementing the Regulation D private placement rules of the JOBS Act within 90 days of its enactment; other regulations must issue within 270 days. Once the regulations are published, offerings under the JOBS Act may begin. The still-to-be-determined question is whether the liberalized regime will jump-start the U.S. capital markets and give new classes of issuers access to capital, or whether the liberalized disclosure regime will discourage investment by skeptical investors.
Owen D. Kurtin is a practicing attorney in New York City and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at firstname.lastname@example.org.